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U.S. Health Care Costs, Part V: Can Americans Afford Medicare?

Uwe E. Reinhardt is an economist at Princeton. For previous posts in his series on why America pays so much for health care, click here, here, here and here.

It is now generally believed that the federal Medicare program for America’s elderly is “unsustainable” and must be “restructured.” This somber assessment is part of the more general cri de coeur so wondrously phrased some years ago in the title of the Brookings Institution’s monograph “Can America Afford to Grow Old?”

What if we couldn’t? What would we do – push the elderly into the ocean on an ice floe?

Of course America can afford to grow old! We can more easily afford it than most other industrialized nations.

The percentage of the American population age 65 or over is 12.4 now and is projected to rise to about 21 by 2050. Only 7 percent of China’s population is 65 or over now, but that figure will shoot up rapidly to over 22 percent by 2050. And in a number of other industrialized countries — notably in Japan, Germany, Italy and Sweden — the elderly already represent close to 20 percent of the population, a level the United States will not reach until about 2040. Yet the world has not come to an end in these older countries.

It’s hard to say what fraction of America’s gross domestic product future generations should allocate to people too old (or too young) to work, and how much should remain with those who have produced that G.D.P. This is a matter to be resolved by those future generations.

They must decide how well the elderly in their midst should be housed, fed and cared for when sick. Our influence over that allocation is minimal, because future generations can always override our decisions while we cannot override theirs. The best we can do today is to put in place public policies that can help G.D.P. grow now and in the future, to ease the pain of sharing. We could also influence somewhat the age structure of future populations through current and future policies on immigration, although there are limits to that approach, because immigrants, too, grow old.

Fortunately, as is shown in the graphical display below, future generations will most likely have the benefit of G.D.P. growth on their side, which should make it easier for them to house, feed and care for larger fractions of elderly citizens.

Current G.D.P. per capita in the United States is about $46,500 (tables B-2 and B-34 here), of which Medicare absorbs slightly over 3 percent, leaving about $45,000 of G.D.P. per capita for other things.

Suppose between now and, say, 2050, inflation-adjusted G.D.P. per capita in the United States grows at an annual compound rate of only 1.5 percent per year, which is conservatively below the roughly 2 percent long-run annual growth rate of real G.D.P. per capita over the past several decades. Even at this low growth rate, inflation-adjusted G.D.P. per capita would grow from $46,500 now to about $87,000 by 2050.

But even after that 8.4 percent haircut for Medicare in 2050, there would still be close to $80,000 inflation-adjusted G.D.P. per capita left over for other things in that year, which is still 78 percent more than the non-Medicare G.D.P. per capita that we have today.

Source: Uwe E. Reinhardt.

So what do we mean when we lament that Medicare will not be “affordable” in the future? Do we assume that G.D.P. will be stagnant for the next 40 years?

Those who make such statements, of course, may not even think about real claims on real G.D.P. Instead they may have in mind two quite different propositions.

First, they may argue that even if Medicare were eminently affordable from a purely macroeconomic perspective, its current structure of mainly public financing may not be politically sustainable. There is no question that to allocate as much as 8.4 percent of 2050 G.D.P. to Medicare under its current structure would require sizable tax increases. But social values and preferences can change. Future cohorts of voting retirees and their children in the United States may well countenance the higher levels of taxation already long accepted in other industrialized nations, in return for greater personal financial security.

An alternative proposition may be that, even if (1) sustaining Medicare in its current structure were eminently affordable from a macroeconomic perspective, and (2) it were politically feasible, we still shouldn’t sustain Medicare in its present form because the program wastes real and financial resources.

There is something to the second proposition, as will be explained in detail in my next post to this blog.

Medicare is a major issue, but ignored by Pelosi and Reid. We will soon face this crisis and Bush will not be around to blame – not his fault, but he seems to be the whipping boy du jour for everything.

The Times should make this a front page issue and do an investigation into Medicare payments, fraud and lobbying.

Health care costs will be lowered when the profit motive is disabled, the recipients accept responsibility for their own health, and administrative excesses are ended. No one who refuses to lose weight and exercise should be entirely supported with tax dollars Banish all prescription ads as other more intelligent countries have done. Demand accountability from doctors who prescribe medicines or procedures that just don’t make sense. At 80 years of age, you don’t need nor should you have a heart transplant.

Just remember that this is not only for the elderly it is ALSO for the people like me who are disabled by no fault of our own who need this so that we also can get the care we need, I agree that it is abused by the 1)drug abuse is a disability, 2)or the over weight people is a disability or 3) the inner city how have WAY TOO MANY KIDS AND DON’T STOP HAVING KIDS SO THEY CAN GET ALL THE STATE PAY FOR FUNDS SO THEY DON’T HAVE TO WORK IS A MAJOR DRAG ON THE SYSTEM.
but it was set up for the people like me and the elderly who have paid in and worked all our lives, Yes it needs to be fixed BUT NO IT DOES NOT NEED TO BE TAKEN AWAY!!

As one of the coauthors of the 1989 book “Can America Afford to Grow Old?” I would like to associate myself with Uwe Reinhardt’s very sensible analysis. The answer that Henry Aaron, Barry Bosworth, and I offered to the question posed by the title of our book was “Yes we can.” The main goal of our volume was to recommend policies that could make an aging population more affordable.

As Reinhardt shows, if total output per person continues to rise, the net income available to future Americans will be substantially higher than it is today, even after we subtract the added taxes we will have to pay for Medicare and Social Security. What is crucial in this calculation is the rate of improvement in worker productivity. If productivity continues to increase at the pace we have experienced in the past decade, then after-tax incomes in 2030 and 2050 will be comfortably above those received by workers today … in spite of the fact that workers will be supporting many more retirees and paying for much more expensive Medicare bills. It is conceivable, however, that productivity improvements will slow. In that case population aging will represent a much greater challenge to future living standards. As we show in “Can America Afford to Grow Old?” the combination of very slow productivity growth and a rapidly aging population would produce dramatically slower growth (and possibly stagnation) in future net wages. This means that future affordability of Medicare and Social Security will partly depend on maintaining healthy growth in productivity. There are policies the nation can follow that would help ensure that outcome, and those are the policies we emphasized in our book.

But it is absurd to continue to restrict Medicare to a population that is demonstrably sicker than the average. If you give Medicare to everyone, you have a pool that simply uses less health care. Furthermore if you remove co-pays, deductibles, limitations and cover completely drugs, you will save hundreds of Billions each year in overhead, physician’s time and high drug prices. The fact is that we could give this kind of super Medicare to everyone and the cost per patient would go down a bit. The evidence is overwhelming. (www.pnhp.org)

One should try reducing medical prices. Price controls are known not to work. The usual rule is to get supply and demand into balance. The medical industry is not immune to this rule, albeit the practitioners would like to pretend otherwise. Balance supply and demand – by enlarging and building new medical schools, and providing scholarships for MDs and assistants? Today, bottomless pit of money from business and government provides huge DEMAND in the form of “benefits”. While SUPPLY remains constrained by antique methods of licensing and training MDs and assistants.

Mr. Reinhardt, I have followed your comments on health care for years. They have been a soothing tone, a calming liet motif amid the social Darwinian screaming of the Republican party. Thank you for your persistent efforts.

When a country as the USA spends such a relatively high percentqage of her GDP on medical expenses with such a low level of achivement as reflected by international comparisons, and when the total costs are rising far faster than GDP, then, I respectfully suggest that the author has drunk too much KOOL AID.

The other problem I foresee is the presumption that the GDP can keep on growing, when the whole world is running out of resources, not even contemplating on the effects of global warming. We must recall that the economic events of the last year or so have indicated that the GDP for the last few years was built on dreams – NOT SOLID FACTS – wherein the destructiion of wealth and increase3in indebtedness created a reality of major losses in the multi-trillion dollar amounts. To catch up to the published GDP of 2007 [14+ trillion] with real adjustment for inflation will be a miracle in 3 years – highly unlikely. It seems to have escaped the notice of the author above that just the servicing of the ever growing national debt will take a larger and larger % of GDP – wherein over half the interst will go offshore [a similar omission from the article is reference to shrinking taxation income of the National, State and Municipal players due to the collapse of the economy – where the cuts in services, thus living standards, are already in evidence.

Please wake up and present realism to the citizens of the USA instead of useless SPIN.

Has any economist investigated the level of mistakes in health care vs other industry? I believe errors cause vast amounts of additional care. In other industries, errors cost the industry. Hence all the zero defect programs that have produced very high quality in most businesses. In health care, patients pay for errors. Doctors and hospitals just bill the patient for the additional services they cause. The market does not function like other competitive markets because patients do not investigate error rates. I believe this could be the cause of as much as 25% waste based on my work in the industry.

Mr. Reinhardt lays aside the emotional elements of the alleged acute medicare problem.
What part of the youngsters’ tax represents
repayment to their parents for bringing them and their children into this world and the cost of raising and educating them – on a compound future basis?
How much of the value of inherited wealth offsets the tax for medicare?
If universal medicare does not exist and people are well educated, will the well informed people without means reduce family size? What are the social, economic and religious impacts of this consequence?
Should laws be enacted that would hold children with means responsible for the care of their parents?

The problem with discussions like this is that only one sector of the economy is examined in isolation.

The government spends 54% of the discretionary budget on militarism. In addition there are hidden costs to society from the excessive devotion to an aggressive foreign policy. We have over 750 foreign military bases, for example. We are building more F22’s even though there is no credible opponent. We are building a new aircraft carrier that the Navy didn’t request.

We are fighting (losing?) two wars with an estimated cost of $2-3 trillion.

It is misleading to show graphs of health spending without reference to spending in other areas. We can afford even inefficient health care if we want to, we just have to adjust our priorities.

The advanced countries with better care don’t have the burden of runaway militarism to bear and it shows.

America spends as much for Medicare as in bottled drinks and pet food COMBINED. Haven’t heard anyone complaining about the high cost of dog biscuits and soda though. The country should be able to afford medicine for old folks.

One issue is whether younger taxpayers will be willing to pay increased taxes for Medicare, when they are cut off from medical care themselves. Europeans pay higher taxes than we do, but in return, they get medical care for themselves as well as the elderly. People under 65 in the US are on their own.

For example, I lost my health insurance when I lost my job. Now I have cancer, and my medical bills will probably push me into bankruptcy. It’s already destroyed me financially. I’ve tried in vain to get some kind of help, but I’ve been turned down everywhere. But my tax money goes to pay the medical bills of seniors, including wealthy seniors. I don’t feel very warm and fuzzy toward Medicare at the moment – hopefully I have many years ahead of me, but my life has been destroyed by medical bills. And yet, an 80 year old can get a free heart transplant.

I’m not inclined to pay more for seniors to get medical help, when those under 65 are thrown to the wolves.

whatever. my mom is disabled. over the years her monies have been cut and cut again, it always rests on me to pick up the slack. these ppl are kept like paupers and treated horribly! how about a tax cut for me since so much of my income goes to take care of her? oh i forgot, the cuts are supposed to make the rich get richer, not actually help anything.

Many of the comments made about the future of Medicare, and the underlying question of the affordability of health care overall, seem to assume that the delivery system will remain basically unchanged. What we see in the current delivery system is individual-MD centered medical decision-making, attempts by payors to somehow put brakes on runaway spending (resisted by physicians), inconsistent quality across the landscape, massive attrition in the primary care physician workforce, and overall cost escalation above GDP growth – in short, a chaotic and dysfunctional system.

Where does cost escalation in healthcare come from? Mainly it comes from new technologies – new therapeutics, new diagnostics (e.g. genomic testing), and new imaging. Look at where VC investments are being made, and you will see where the emerging costs in the healthcare system will come from. So long as the business model (which drives VC investment) remains that individual physicians will implement new technologies (which worries payors), those specialties where the new technologies are applicable will profit. Physicians will flock to those specialties, and abandon primary care, leaving the lynchpin of coordinated care (primary care) the weakest link.

Delivery-system reform is centrally important. And with a new administration, with fresh eyes and (hopefully) a new desire to create new incentives within healthcare, and a realization that reform must be more granular given that there is great disparity within the physician healthcare community, the delivery system must change. Incentives to attract newly-trained physicians into primary care, the need to develop meaningful, accountable physician networks and communities – these must take place. The impact on the global cost of healthcare is uncertain. It should improve, but there isn’t experience yet to have meaningful data. The impact on quality and consistency should by all means improve. And the areas where investment in R&D will be driven by a new set of business models – investment in technologies such as web-based, hosted and free Electronic Medical Records (referred to as “EMR 2.0”), for example, will point the way to a new future. To “change.”

As ‘Frederick Douglass’ stated OVER 100 years ago, “Power concedes nothing without demand. It never has and never will.”

The American people need to forcefully ‘demand’ the universal health care that citizens of all other advanced democracies have as a universal right.

When ruling-elite corporate sectors, like banking, demand anything from ‘our’ government (even if those demands are unreasonable) they get it!

The primary reason that the corporate elite get what they want (aside from bribing ‘our’ representatives) is that their demands threaten a ‘brinksmanship’ of wrecking the system if they don’t get their way.

It’s time for average American citizens to do the same thing — and more if necessary to get universal health care, and to get it NOW!

Currently about 50 million un-insured Americans get their emergency health care from emergency rooms, while another 150 million Americans overpay on gouged health care fees and just complain that things get worse every year. (So there are those with the worst, and those with the least worst —- Sound familiar?)

But if the combined 200 million Americans acted together, in solidarity, against this cruel and unsustainable system by using the ‘brinksmanship’ tactics that corporations use, we would all have universal health care overnight.

The 50 million un-insured are already doing some of their part by just by suffering under this economic tyranny — but now they need to turn-up the heat and take civil action.

The 150 million, who are being squeezed into poverty by over-priced insurance and and predatory drug costs have to recognize that they are in ‘the cattle shoot’ to join the un-insured and they need to simply stop paying any health care costs and jam the emergency rooms of all hospitals — in ‘sit-ins’ if necessary.

Over 200 million of us are getting screwed out of the birth rights of universal health care that the citizens of all other wealthy advanced democracies expect and demand — while we are sitting around complacently and watching our supposed government give away $700 Billion to crooked bankers who are cheating us to death on credit card usury.

Throw open your window. Put your head out. And shout, “I’m not going to take it anymore”.

If standing together, 200 million strong, and not paying our gouging health insurance premiums, and flooding the nations hospital emergency rooms with our sick children throws a monkey wrench in the immoral gears of this corporate government and threatens to bring the economy to a halt, then so be it —– that’s what the crooked banks, investment banks, insurance corporations (like those bastards at AIG), the Wall Street brokerage houses, private equity pirates, and hedge fund whores just did. And look how fast the government gave in to their brinksmanship to get what they wanted (our money).

“Power concedes nothing without demand. It never has and never will.”

The power of the multitude in solidarity can achieve anything together.

I think one issue that the author failed to consider is that health care may be a luxury good on a national level, that is as the U.S. gets richer it will choose to consume an increasingly larger quantity of health care. If this is true, then there is no way our economy can “grow” us out of the problem of affording Medicare.

Great article. However, there is one line of logic I find hard to agree with. You say currently the GDP per capita is $46,500 and Medicare absorbs 3% ($1,395). In your “conservative” projection, you say in 2050 the GDP per capita will be $87,000 and Medicare will absorb 8.4% ($7,308). Now I agree with you that our “Non-Medicare” GDP will be larger than it is today (corrected, 76.7% larger), but I don’t see this as a reason to brush off the 524% increase in our Medicare costs! It seems to me as if you view the inflationary increase of GDP like you view a raise at work. If, 40 years from now, we all get a 87.1% raise, and all our expenses stay at current levels as you seem to assume, then I agree that we will be able to easily afford it. However, in reality along with our GDP per capita increasing from $46,500 to $87,000, our expenses will at least keep par, and as you point out, one expense won’t keep par but will increase 524%!

While I’m not an economist, I’ve always appreciated your perspectives on the healthcare industry. However, long term projections have a way of being frequently derailed.

Two points to consider:

What’s magical about retiring at 65? Given the looming baby bust, maybe we should think of 70 as the new 65.

Health care costs will never be slowed until we change the financial incentives in the system that overvalue doing proceedures and undervalue primary care. Medicare’s payment system is at the center of this problem because it is emulated by so much of the non-Medicare system.

It is clear to me that the generations now in power have demanded a high level of benefits, without being willing to pay for it, shifting costs to the future when younger generations will not have similar benefits in old age. In reality, average wages for younger generations are lower than for those who came before, and tax burdens are higher. If you don’t believe me and want lots of number, read this:

Personally, I’m not willing to wait until I grow old to see what will be left for me. I want to know what I (if I lose my job) and my children will receive right now. Can we afford to provide those over 65 and retired with extensive health care with no Medicare taxes, while providing absolutely nothing to those younger with extensive taxes? As I described here:

The Affordable Care Act imposes economic burdens that are the equivalent of taxes, an economist writes. Read more…

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